"But divide your investments among many places, for you do not know what risks might lie ahead."
- Ecclesiastes 11:2 NLT
It appears from the verse above, that the idea of diversification is not necessarily a new one. Those of us who consider ourselves creative people sometimes forget the reality that most times—both good and bad— have been lived through before by people far wiser than us.
But with that headwinds that I believe we may face over the next year, and in fact decade, it may take more than just good old-fashioned diversification to sail steadily through the season(s) ahead.
Evaluate the Past
We have to steady our ship. And to do this we have to steady our minds. With some of the metrics shown below you might be tempted to be lulled to sleep by recent returns. But the past will not keep you steady when market winds below. In addition to reading blogs like this and other quantitative writings on stock market investing, you might want to consider reading up on behavioral finance. Such research might help you keep your emotions in check.
But since this quarterly stock market update usually looks back before it looks forward. Let's look at some numbers from 2019.
Vanguard CRSP Model Portfolios
If you'll recall 2018 ended dismally. It was the worst quarter in quite a while and most equities finished the year in the red. A lot of intelligent people moved money to the sidelines. However, this decision left them not only scratching their heads but missing some amazing opportunities to make a very respectable profit.
An opportunity missed in the large cap arena would have been Vanguard's Growth ETF. Ticker symbol VUG, this fund finished the year at +37%.
From a more diversified perspective, Vanguard's 60/40 portfolio returned +19%. Even a very conservative investor with 80% of his money in bonds and 20% of his money in stocks, would finish the year at +11%. These numbers do not include advisor fees, expenses, etc.
*Source: Vanguard ETF Strategic Model Portfolios/ December 31st, 2019.
Understand the Present
Presently we find ourselves in another election year. We are also in a trade war with China. If that's not enough we are experiencing continued historically low interest rates, and the coronavirus outbreak. .
I recently attended a webinar from AlphaStar Capital management titled: 2020: The Year of Paradox. One example of paradox is the fact that stock prices continue to rise as earnings continue to fall. It's almost as unnerving as the inverted yield curve we began flirting with last year. Some of this just doesn't feel right.
I also attended a live webinar recently with "Global Chief Economist and Head of Investment Strategy Group Joe Davis at Vanguard." Anyone with a title that long has to be pretty smart, right? His outlook for 2020, as well as the next decade can be summed up in one word: subdued.
10-Year Investment Outlook
Vanguard's 10-year annualized nominal return projections, based on market conditions as of September 30, 2019, are as follows:
Please bear in mind that these are just assumptions. They are best guesses from very intelligent people.
However, I can tell you from past experience that they are wrong—a lot. The biggest example I can give of this is how those in the know have touted international stocks over the past five years verses US stocks. They were wrong about this assumption. US stocks have continued to show their teeth over the last five years, so please know that even the best minds in the business don't always get it right.
Stay the Course: Optimally Allocated Global Portfolio
So, what do we do now? I believe the best thing to do is to lean back on fundamentals.
"Invest in seven ventures, yes, in eight; you do not know what disaster may come upon the land."
- Ecclesiastes 11: 2 NIV
I am a strong believer in optimal global diversification. That means investing in US large-cap stocks, US small-cap stocks, internationals, emerging markets, short, medium, and long-term bonds, global bonds, global emerging bonds, as well as fixed indexed annuities when bonds are underperforming. Diversify, diversify, diversify.
My opinion is that it is always an appropriate time to be invested in a highly diversified portfolio of stocks, bonds, and fixed indexed annuities. Given enough time, the risk should be worth the reward. Even during an election year.
Vanguard 2020 Outlook at a Glance
Vanguard CRSP Model Portfolios
About the Author
Jeff Headrick is an independent financial planner and wealth manager with Inspire Financial Planning. When Jeff was still in his teens his father died unexpectedly. While his father was a hard worker and a good provider, he did not have the best financial plan in place when he died.
This left his family at a tough financial crossroad. This personal experience, coupled with being inspired by Sir John Templeton, Warren Buffett, Dave Ramsey, and the laws of compound interest, prompted Jeff to enter the financial services industry in 1999. He has been helping people with their financial planning ever since.
Jeff lives in Wilmington, NC with his wife and two children. He spends most of his spare time just across the Intracoastal Waterway in Wrightsville Beach, enjoying the beauty of the NC Coast.
Charts and graphs contained herein should not serve as the sole determining factor for making investment decisions. All hypothetical scenarios are for illustrative purposes only. Investment Advisory Services offered through AlphaStar Capital Management, LLC a SEC Registered Investment Adviser. SEC registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the adviser has attained a particular level of skill or ability. Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.
Diversification does not guarantee profit nor is it guaranteed to protect assets. International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. Past performance does not guarantee future results.
You cannot invest directly in an index. Consult your financial professional before making any investment decision. Fixed income investments are subject to various risks including changes in interest rates, credit quality, inflation risk, market valuations, prepayments, corporate events, tax ramifications and other factors.
These are the views of Inspire Financial Planning and not necessarily those of AlphaStar Capital Management, LLC, and should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your financial advisor for further information.